Market Value & CapitalizationEquity
The value of a firm’s equity is subject to extreme change based on the chosen valuation process. There are three methods typically used for share value estimates. The first is Capitalization, the second is Book Value, and the third is Intrinsic Value. A firm’s capitalization refers to the total value of all shares for sale on the market. It’s important to note these shares are released shares, or share’s outstanding. Shares owned by the firm which have not been released, or treasury shares, do not qualify in capitalization measurements.
Capitalization is based on the market price, which rises and falls based on the demand versus how many shares outstanding are freely available on the market (the supply). Shares are categorized based on their capitalization size. There are five potential categories. Each size has different risks, growth rates, and stability.
The first of these, and the lowest, consists of Micro-Capitalization. Micro-Capitalization consists of values under $250 million. Small Capitalization, above micro, ranges from $250 million to $1 billion. The third capitalization size is Middle Capitalization, or “Mid Cap” which ranges from $1 billion to $10 billion. Financial risk increases with decreasing capitalization sizes, and this is especially true below middle capitalizations. Smaller companies contain substantial room for growth, but there is a higher chance that a firm will fail before this growth materializes. This potential attracts investors to the firms, who in exchange for the large risk demand to see growth occur. There are risk issues other than failure to grow. Smaller firms usually are donated smaller amounts of coverage than larger firms. Information concerning these firms can be slow to arrive. Additionally, these shares may have smaller total shares outstanding. These result in potential trading liquidity issues, the possibility of buyers or sellers failing to find someone on the other side of their deal.
The fourth capitalization size is Large Capitalization, which ranges from $10 billion to $25 billion. The final capitalization size is Mega Capitalization, which is above $25 billion. Both large and mega capitalization size firms are generally safer and more stable investments than firms below mid-capitalization. In exchange, they generally have less growth potential, since the firms have almost fulfilled their growing potential already. The result is higher stability, but less growth potential. Since these firms have large capitalizations, trading liquidity issues are highly unlikely with these shares.
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